High returns dwarf corporate governance in fund managers’ minds

Corporate governance is all well and good, but how much do fund managers actually care about minority investors? Perhaps not at all — especially when high returns are at stake.

Santosh Nair of MoneyControl.com, an Indian financial portal, recently highlighted multiple companies in India that have been forsaking minority shareholders, instead looking to do what is best for the company’s stock returns instead of minority investors.

In one present example, minority shareholders — and particularly institutional investors — have attempted to protest automobile manufacturer Maruti’s move to transfer its Gujarat plant to a 100 percent arm of parent Suzuki. While some minority shareholders have threatened to unload stock in the name of corporate governance, most financial analysts do not take their threats seriously.

“For all the posturing when company managements try to shortchange minority shareholders, fund managers are ultimately guided by the returns on their stocks,” Nair wrote. “That is why you find institutions putting money in companies that are not exactly famed for their corporate governance standards. “

Corporate governance concerns have begun to heat up in the United States during the 2014 proxy season, but ultimately, the almighty dollar still rules all, especially in the conflict of executive pay. While directors and investors both believe that the U.S. executive pay model has improved over the past five years with the rise in say-on-pay voting, the two sides still remain divided over say-on-pay voting’s overall impact.

According to a January 2014 study by Towers Watson and Alliance Advisors, 26 percent of directors believe say-on-pay votes have been a key driver of pay decisions by boards, compared with 63 percent of investors who feel that way. In addition, only 20 percent of directors say the executive pay model in the U.S. has led to excessive CEO pay levels, while 72 percent of investors believe that statement is true.

As Gary Retelny, the president of advisory firm Institutional Shareholder Services told InsideCounsel in February, the concept of linking pay and performance is not a new concept, but it has become top of mind in recent years.

“I believe what shareholders are now demanding is a more specific linkage between pay and performance. There is always a discretionary element of executive pay within a company…they want to see in those pay packages a much more direct link between pay and performance and by that I mean a quantitative link. They are not saying what the metric should be, but they want to see that linkage,” Retelny said.

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